Battipaglia's Best Bets
03/19/2004 12:00 am EST
Joe Battipaglia, chief investment officer for Ryan, Beck & Co., and an expert on section allocation, maintains a portfolio made up of ETFs. Here's his overview of the market outlook and a review of the largest positions in his ETF portfolio.
"The Federal Reserve has released its quarterly Flow of Funds data, which shows that estimated household assets including stocks, bonds, cash, and real estate are now valued at over $54 trillion. This is a dramatic recovery in a very short period of time. The stock market downturn took two and one half years to complete and it took just a little over six months of surging prices to restore balance sheet asset values to their pre-March 2000 levels. It is not surprising, then, that it has become more difficult to find compelling investments as it was a year or two ago. Most of our equity indexes have moved from deep discounts to at or above 'fair value' ranges. Thus, while hardly anyone can complain about rising asset values, it has made investment decision-making all the more difficult.
"However, there are a number of potential positive surprises that could impact the economy and investor attitudes in a favorable way. Such surprises might include additional progress in the war on terror, a longer running expansion with accelerating job growth, sustained growth in profits, rising productivity, low inflation, and expanding real incomes. Where can equities be in 12 months? We expect that 12 months from now stock prices will be discounting roughly $70 in forecast earnings for the S&P 500 companies. Assuming an 18-20 multiple on that number, then the S&P 500 would trade in the range of 1,260-1,400, which would produce a 12% to 16% annualized rate of return over the next 12 to 18 months. Meanwhile, here are our largest ETF positions:
"Select SPDR Healthcare (XLV ASE) holds a 16% position in our ETF sector portfolio. Fundamental factors such as demographics, new technologies, and 'lifestyle' enhancers should expand the market potential for the sector. Favored groups include select pharmaceuticals and biotechnology companies, healthcare service providers, and medical-device companies. Select SPDR Consumer Discretionary (XLY ASE) is our largest sector weighting at 18%. Retail sales have been moderate but remain positive as the effect of interest rate cuts run their course. Select SPDR Financials (XLF ASE) has a 14% weighting. However, we would note that the interest rate environment and net interest margins on traditional banking business are probably as good as they are going to get, and the mortgage refinancing boom is behind us. Select SPDR Information Technology (XLK ASE) has a 16% sector position. As the capital spending cycle accelerates, following underinvestment in productive capacity during 2000-2003, we should see a recovery in hardware and software sales. Valuations appear rich but longer-run opportunities exist given high return on equity, low debt, and growth. Select SPDR Industrials (XLI ASE) has a 15% weighting. Wholesale and retail discipline on inventories should prove to be a positive."